Audit Quality and the Pricing of Discretionary Accruals

By Gopal V. Krishnan. 2003

523 citations recorded by the source corpus.

Accrual‐based earnings is considered superior to cash flows. Accruals allow managers to communicate their private and inside information and thereby improve the ability of earnings to reflect underlying economic value. However, managers could engage in aggressive reporting of accruals that would seriously undermine the informativeness of reported earnings. Since outsiders cannot directly observe earnings, high‐accrual firms face greater agency costs relative to low‐accrual firms. Auditing plays an important role in mitigating these agency costs by constraining opportunistic management of accruals. This study examines whether there is a linkage between audit quality and pricing of discretionary accruals. The findings indicate that the association between stock returns and discretionary accruals is greater for firms audited by Big 6 auditors than for firms audited by non‐Big 6 auditors. Further, discretionary accruals of clients of Big 6 auditors have a greater association with future profitability than dis...

Subfields: Accounting, Strategy and Management

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Citations in the corpus

Time budget pressure, auditors' personality type, and the incidence of reduced audit quality practices (2007, background): “, 2003), auditor monitoring strength (DeAngelo, 1981; Bell et al., 2001; Krishnan, 2003), information credibility (Beatty, 1989; Jang and Lin, 1993), and information quality (Frankel et al.”
Auditor Reputation and Earnings Management: International Evidence from the Banking Industry (2010, background): “Auditor industry specialization/expertise is typically measured by an auditor’s industry market share (e.g., Balsam et al., 2003; Krishnan, 2003) in each country.”
Audit Quality: Insights from the Academic Literature (2013, background): “…in total, or income-increasing accruals alone, and proxies for audit quality including Big N auditors (Francis et al. 1999; Kim et al. 2003), auditor specialization (Krishnan 2003b; Balsam et al. 2003), auditor tenure (Myers et al. 2003) and audit office size (Francis and Yu 2009).”
Should We Stay or Should We Go? Accountability, Status Anxiety, and Client Defections (2006, unknown): “Krishnan (2003) found that reported earnings, which are potentially subject to aggressive and opportunistic accounting by managers, are more informative when firms are audited by high-quality auditors, as demonstrated by a stronger association between reported earnings and stock returns for these…”
Type of earnings management and the effect of ownership structure, firm size, and corporate-governance practices: Evidence from Indonesia (2008, background): “Krishnan (2003) finds that external auditing is often used as a proxy for corporate-governance practices and plays an important role in constraining opportunistic earnings management.”
Does a Lack of Choice Lead to Lower Quality?: Evidence from Auditor Competition and Client Restatements (2013, unknown): “We include both of these measures because prior literature finds that industry expertise improves audit quality (e.g., Balsam et al. 2003; Krishnan 2003; Francis et al. 2005; Romanus et al. 2008; Reichelt and Wang 2010).”
Does Religion Matter to Owner-Manager Agency Costs? Evidence from China (2012, background): “Prior literature suggests that high quality auditors play an external monitoring role in reducing agency costs between management and share-holders (Krishnan 2003; Khurana and Raman 2004).”
Does Increased Audit Partner Tenure Reduce Audit Quality? (2008, background): “, see Dechow & Dichev [2002]; Krishnan [2003]), assuming that higher estimated discretionary accruals reflect lower earnings quality and thus lower audit quality.”